Market Supply and Demand Market Demand and Supply and Equilibrium Prices

Market Supply and Demand Functions of Prices within the market mechanism Prices provide the main method through which scarce resources are allocated between competing uses in virtually all modern economies The Signalling Function  Prices signal what is available, giving information to producers and consumers alike  If prices signal wrong or misleading information, then markets may perform inefficiently or break down completely The Incentive Function  Prices create incentives for economic agents to behave in ways consistent with their self-interest. For example, the rising price of a good may: Result in a firm expanding production of that good in its pursuit of profit-maximisation Result in a consumer contracting demand as she tries to maximise her overall ‘utility’ with her limited income

Market Supply and Demand Demand: Buyers in the Market Demand:  The quantity of a product consumers are willing and able to buy at different prices in a specified time period  Normally there is an inverse relationship between the price of good X and the quantity demanded of good X  This is shown by a Demand curve which shows that when price falls demand increases, and when price rises demand falls.

Market Supply and Demand The Demand Curve The demand curve shows how quantity demanded responds to a change in the goods own price A fall in market price causes an movement up along the demand curve A rise in market price causes a movement down the demand curve. P1 Q1 P2 Q2 P3 Q3 D Output (Q) Price

Market Supply and Demand Shifts in the Demand Curve P1 Q1 P2 Q2 P3 Q3 D1 D2  Main Conditions of Demand  Increase in consumer population  Increase in income  Consumer tastes shift toward the good in question  The price of substitute rises  The price of a complementary good falls  The Bank of Thailand cuts interest rates Output (Q) Price

Market Supply and Demand Factors Affecting Market Demand for Beef These are factors other than the price of beef itself Fall in consumer incomes (real purchasing power) An increase in the price of chicken ( a substitute) A government tax on hamburger producers A successful advertising campaign Rise in the price of Yorkshire Puddings (The best!) A fall in the price of lamb A fear of recession and rising unemployment

Market Supply and Demand Facts About Demand Quantity demanded is the quantity that consumers are willing and able to buy at a specified price A change in the price of the good itself does not shift demand - it causes a movement along a demand curve….. Demand curves normally slope downward – why?  A fall in price increases the real purchasing power of the consumer (the income Effect)  A lower price stimulates a substitution effect away from other products in the market  Consumers can now enjoy more satisfaction from each pound spent The demand curve for a product can shift (outwards or inwards) when factors other than price change

Market Supply and Demand Market Supply Market Supply –  The quantity that producers are willing and able to OFFER for sale at different prices during a specified period of time  Normally a positive relationship between the price of good T and the quantity supplied of good T Factors that affect market supply  Technology  The cost of factor resources used in production Wage costs Raw material prices  The prices of “related goods” eg farmers may switch from producing coffee to durian. The supply curve for coffee shifts to the left.  inThe number of producers / suppliers in the market  Government taxes and subsidies

Market Supply and Demand The Supply Curve P1 Q2 P2 Q1 P3 Q3 S The supply curve shows how quantity supplied responds to a change in the goods own price A fall in market price causes an contraction along the supply curve A rise in market price causes a expansion of market supply Price Output (Q)

Market Supply and Demand Shifts in the Supply Curve P1 Q2Q1Q3 S1 S2 S3 Changes in market supply come from: (a)Changes in production costs (b)Producer taxes and subsidies (c)Changes in technology (d)Weather / climate for some primary commodities (e)Number of producers in the market Price Output (Q)

Market Supply and Demand Facts About Supply The “quantity supplied” is the amount sellers are willing and able to offer for sale at a single price--it’s a single number. The change in the price of the good itself does not shift supply--it causes a movement ALONG the supply curve. Supply curves normally slope upward. Why?  Rising prices act as an incentive for producers to expand output – potential for higher profits  Increased output may lead to higher costs of production

Market Supply and Demand Market Equilibrium D S P1 Q1 Equilibrium established when market demand = market supply At P2 there is excess supply (S>D) At P3 there is excess demand (D>S) P2 P3 Price Output (Q)

Market Supply and Demand Shifts in Demand and Price D1 D2 Q1Q2 A change in market demand will lead to a change in market price If demand shifts outwards from D1 to D2 – we see a rise in both price and quantity Total spending by consumers will rise S2 P1 P2 Price Output (Q)

Market Supply and Demand Changes in Supply and Price D S1 P1 Q1 In the example shown we see an outward shift in the supply curve Market price falls from P1 to P2 Equilibrium quantity rises from Q1 to Q2 Does the consumer benefit? S2 P2 Q2 Price Output (Q)

Market Supply and Demand A Rise in Market Demand D P2 Q2 S1 P1 Q1 Change in consumer tastes and preferences causes an outward shift in demand Increase in demand puts the pressure on available supply Increase in equilibrium market price and quantity Total spending increases Producers enjoy higher total revenue / profits D2 Price Output (Q)

Market Supply and Demand Key Terms Market  a set of arrangements by which buyers and sellers are in contact to exchange goods or services Demand  the quantity of a good or service that buyers (consumers) wish to purchase at each conceivable price Supply  the quantity of a good or service that sellers (firms) wish to sell at each conceivable price Market/Equilibrium price  The price at which quantity supplied = quantity demanded  The price where there is no excess demand or excess supply